Taseko Mines: A Race Against Time

| About: Taseko Mines (TGB)

Summary

Taseko's Q2 results were a bit disappointing due to mill throughput issues. However, Taseko's future primarily depends on copper prices improving in conjunction with improved copper grades.

At $2.25 copper, Taseko should generate slightly positive cash flow in 2H 2016. Net debt will increase slightly due to the deferral of power costs and Red Kite interest though.

2017 will be very important to Taseko's financial situation due to high copper grades. Taseko's future hinges largely on copper prices in 2017.

I think restructuring may be considered if copper prices remain at current levels throughout 2017.

Improved copper prices could offer Taseko a lifeline, although its 2018/2019 copper grades (and copper prices) along with spending on its other projects will also have an impact.

Taseko Mines (NYSEMKT:TGB) announced its Q2 2016 results, which were a bit on the weak side with some mill throughput issues combining with low copper prices to result in a significant loss and cash burn. Taseko also has fully drawn down its Red Kite secured credit facility, leaving it with $69 million USD in cash on hand and probably limited options for additional liquidity should it need it.

However, despite this situation it appears that Taseko's financial situation should be okay for now, with cash flow expected to be just above breakeven in the second half of 2016 with $2.25 copper, and improving copper grades leading to (potentially significant) positive cash flow in 2017. Taseko really needs at least somewhat improved copper prices in 2017 though to take advantage of temporarily higher copper grades and bolster its financial position ahead of its 2019 maturities.

Q2 Production Results

Taseko's Q2 2016 production results were a bit weak, with total mill throughput coming out to 7.2 million tons as there were a couple one-off issues that affected mill availability and reduced it to 93% of design capacity. As a result of those issues, copper production didn't increase as much as expected from Q1 2016 levels and ended up at 30.6 million pounds compared to the 32.9 million pounds of projected production at 100% of mill design capacity.

Production costs for the quarter were solid, with site operating costs registering a minor increase to $9.67 CAD per ton milled. Despite a significantly higher head grade in Q2, total (C1) operating costs only went down slightly to $2.07 USD per pound from $2.11 USD per pound in Q1. The main reason for that is the Canadian dollar strengthening against the US dollar. The exchange rate was $1.29 CAD to $1.00 USD in Q2, compared to $1.37 CAD to $1.00 USD in Q1. If Q2's exchange rate was similar to Q1, the total (C1) operating costs would be around $1.96 USD per pound. Note that the power cost deferral improves cash flow by $0.16 USD per pound, but I do not think it affects total (C1) operating costs since the power cost is still an expense, albeit with deferred payment.

Expected Second Half Cash Flow

The second half of 2016 should show improved cash flow as higher copper head grades help improve production levels and reduce the cost of production per pound. Total (C1) operating costs could end up at $1.85 USD per pound during 2H 2016 based on a 0.275% copper grade, design mill availability and throughput, site operating costs of $9.75 CAD per ton milled, a $1.30 CAD to $1.00 USD exchange rate and molybdenum prices around $6 to $7 USD per pound.

At $2.25 USD per pound copper, Taseko could then end up with slightly positive cash flow during the second half of the year, with $119 million USD in revenue (based on its 75% share of Gibraltar's production) offset by $114 million in various costs and expenditures.

$ Million

2H 2016

Revenue

$119

Less: Production Costs

$101

Less: General And Admin

$5

Less: Capital Expenditures

$5

Less: Purchased Put Options

$1

Plus: Deferred Power Costs

$7

Less: Cash Interest

$9

Total Cash Flow

$5

Click to enlarge

This is consistent with Taseko's expectation that its cash position will fall in Q3 2016 and start going up after that. I believe Taseko's year end cash position should be fairly similar to its current cash position.

However, it should be noted that Taseko's net debt will likely go up during the second half of 2016 due to the deferred power cost liability and accrued interest on its Red Kite Senior Secured Credit Facility. Those two items would result in $5 million in positive cash flow during the second half of 2016 translating into around a $5 million increase in net debt.

Beyond 2016

Taseko mentioned that it expects high copper head grades in 2017 of close to 0.30%. This may allow Taseko to produce 158 million pounds of copper (100% share) with design mill throughput and an 85% recovery rate. As a result, Taseko may be able to deliver $30 million in positive cash flow and around $10 million in net debt reduction at $2.25 copper, both improving by around $29 million by every $0.25 increase in the price of copper. I'm using more conservative figures in my cost model now compared to before, so there is some room for potential improvement.

I am uncertain about the exact projected copper grade at Gibraltar in 2018 and 2019, and this is something that needs to be investigated further as it could have a significant impact on Taseko's ability to deal with its 2019 debt maturities.

In general though, we will probably know by the end of 2017 whether Taseko is in decent shape to deal with its 2019 debt maturities or whether it will be potentially looking at restructuring and/or sale options at that point. The end of 2017 is around 15 months before its debt starts maturing. Thompson Creek ended up selling itself to Centerra around 17 months before its secured debt matured.

Conclusion

Taseko's Q2 2016 results weren't stellar, but the second half of 2016 and 2017 look to be significantly better. I am not concerned about Taseko's liquidity right now. However, Taseko really needs copper prices to improve to take advantage of higher copper grades and make a significant dent in its net debt position. By the end of 2017 we should have a reasonably good idea about whether Taseko will be able to deal with its 2019 debt maturities or whether it will likely need to sell itself or look into restructuring options. The distressed prices of Taseko's unsecured bonds and the high cost of its Red Kite secured facility indicate significant concern about Taseko's long-term situation.

Taseko's other potential projects could also impact its financial situation. If Taseko spends a significant amount of money advancing its Florence project and/or attempting to get its New Prosperity project approved again, that will make its financial situation more precarious. However, if those projects are sellable, then that gives Taseko some other potential options to reduce its debt (depending on Taseko's interest in selling too).

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Disclosure: I am/we are long TGB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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